KARACHI, March 21: The quarterly report of the State Bank cautions that favourable external sector outcome should not “lull us in a false sense of complacency.”

It adds that there is a “long and daunting agenda” and “temporary gains” should not detract us from pursuing reforms vigorously.

Despite the increased foreign assistance and favourable external development, the report points out that “outlook of domestic growth, investment, budgetary revenues and employment does not show signs of improvement.”

On an optimistic note the SBP says the improved external sector should provide “sufficient signals for the expected turnaround of the economy” for the second half of current fiscal. The report, however, hastens to add “but this is still not obvious and cannot be taken for granted.”

Perhaps, the State Bank does not want to be proved wrong once again. When the IMF came on board with the stand by arrangements, officials pinned a lot of hope that there would a change of fortune with anticipated arrival of foreign investment. These hopes were raised by IFIs. It did not happen.

The strengthening of the external sector is not the outcome of an improved performance of the economy. It is primarily a windfall from 9/11 that came from foreign grants, specially $600 million from the US, debt relief of $1 billion for current fiscal by Paris Club and nearly doubling of home remittances to $950 million as a result of international scrutiny of foreign exchange payments. And external support is the result of change in Pakistan’s international political status. It is widely recognized that it is the superpower politics that is at the centre of US aid programmes.

Foreign exchange reserves have shot up to over $5billion, made possible through purchases made by the State Bank from both kerb and inter-bank market, external assistance and debt relief. The central bank says it has mopped up surplus from the inter- bank market. It speaks volumes for the low level of domestic economic and investment activity.

Exports are stagnant, imports are falling and the contribution of foreign trade in GDP is remaining almost unchanged. The export-led growth remains an illusion.

The external sector has improved by foreign support and not because of any reforms or due to the improvement in the fundamentals of the economy. And as put by SBP report it is a” temporary gain” which does not give the central bank the confidence to merge the kerb and inter-bank markets, though the SBP report admits “unprecedented positive developments in the exchange market have created a unique opportunity” to do so.

Policy makers fail to discern the difference between IMF driven reforms with global agenda and a national agenda for domestic market reforms.

Pakistan’s external agenda should be an extension of the domestic agenda and not vice-versa. Unless this transformation takes place and the process is reversed, the domestic economy would continue to stagnate. If the external sector has become less vulnerable, it is not because of strength of the national economy.

There has been no movement from “dependency”, to inter- dependence or shift towards independent path of economic development.

Instead of pursuing an export-led growth in a global recession, more of a myth than reality, policy makers should focus on making the domestic market more prosperous.

The State Bank has rightly observed “poverty alleviation agenda should be implemented through broad-based economic growth, investment in human development and targeted interventions.” Without grassroots prosperity, the size of the domestic market would remain unattractive for big investment and large production facilities.

“Import of machinery (except textile machinery) has been declining over the years, indicating industrial stagnation and poor investment confidence in the country,” says the SBP report.

European diplomats visiting Karachi have indicated to the local businessmen that foreign investors are waiting for October elections, restoration of constitutional rule, and for rule of law before making any large investment commitment. Of course, they are taking a fresh look at investment potentials. There is some revival of interest.

When the private investment and economic growth dips, government spending helps revive the business activity. Neither the State Bank nor the Ministry of Finance in their quarterly/six monthly review of the economy has come out with the performance of the Public Sector Development Programme.

The development spending has remained stagnant at around Rs100 billion for past few years despite annual increases in budget allocations, now at Rs140 billion. Similarly, there is no word about how the poverty reduction programmes are progressing.

How the government has performed on development spending has not been made public. Perhaps, the performance does not merit the glare of publicity.